Large, Mid, Small Caps, where to invest?

When it comes to mutual fund investing, Investors are generally confused as to where they should invest their money, some times large caps are doing well, some times Mid-caps are beating large and Small caps giving very high returns.

When you invest in Large cap, Mid & Small caps do well, while you are there, it goes opposite. Then, you decide to have all of them, the whole market goes down.

How to overcome this confusion & where to invest.

If we can get a better understanding of what to expect from each category, that will help us make a wise decision.

Let’s go from large Cap segment.

Large cap consists of big companies of our country, the top 100 by the stock’s market valuation. They are well established in their businesses and have consistent performance. On hearing this, your mind will say, ideally this is where we have to be invested.

Yes, It is a very wise thought. Every investor should have some exposure in large cap, because they form the back bone of the economy. Owning them will help you grow your savings as the economy grows.

AS they are well established and consistent in growth, can I have all my investments in Large cap?

No, you will miss the actual potential of Mutual Fund or stock market investing.

Large business are steady yet slow in growth. So are their stock prices too, they don’t give big returns.

Average growth is at 7-10%

Why large cap stock prices don’t have big gains?

Stock prices go up based on the growth in profits the companies make. These big companies have grown so big that, from wherever they are, having say a 100% growth in a year is not going to be possible.

For example let’s take ITC. It is a company  that is more than a century old now. It’s annual sales is 42K crores and it makes a profit of around 12K crores.

Almost all of us will be consuming at least one product that ITC manufactures, in our daily life, yet what is the possibility that ITC’s profits will double in the next one year. That is from 12K crores to 24K crores in 1 year. It is practically impossible to double in one year, while it has all the possibility to double in 6 -7 years’ time, & so will be the stock price, it will double too in the same period.

Being big makes them trusted names, while their growth will have a slow & gradual increase.

Investors in Large Cap fund can be confident of having 7 to 10% returns and they will deliver.

Now, what is different in Mid & Small caps?

They are fairly small businesses,

Bring in some new innovation,

Can adopt faster to market dynamics with their products

Management is lean, which helps in faster decision making, which is also a disadvantage is the decision backfires. The company will go up in air.

Whereas when everything clicks, their space for growth is phenomenal.

Example: Jockey, how many of us used jockey 10 years back. Not many right? Because it was a luxury those days. As our country grew in income, so did the populations taste for branded products. Today, at least 50% of population know of this brand and there is a large percentage who are using it too. Else the company which had 650 crores sales in 2011 could not have grown to have 3000 crores of sales in 2018. Profits, which was at 85 crores in Mar 11, now grown to  411 crores. Near 5 times growth in 7 years.

Where ITC grew 100% in  7 years, Jockey grew 500% in same period.

What happened to Jokey share?

It grew even faster, 1200% in 7 years.

How do you like it?

Profit growth was fast, stock price grew even faster. That is the power of Mid & Small caps.

Jockey had space to grow and had the product that quenched the thirst of a growing population. Will Jockey repeat the same run in the next 7 years, for sure it will not.

Funds having this stock in their portfolio have to ideally reduce exposure to the stock and look for the next similar stock for their portfolio.

Now the next question that will ring in our mind.

If Mid & Small cap funds can give such high growth, why should we invest into any other segment and have lesser growth, why not invest only in Mid & Small caps?

You can do, only that, you need immense patience and tonnes of belief on the fund manager because, when the funds go through bad phase, you should still stay invested, only then you will be able to reap such big gains. When the tide turns valuations just trip and prices fall like 9 pins. It will get back and run again, which can take good long time. This is the period where investors lose patience and take wrong decisions.

So, ideally having a mix of both is the best choice and for that we have the Multicap funds which have all the segments in their holdings.

These are funds which invest into a mix of all the segments, helping investors get a better return than Large cap yet safe as the spread is mixed.

Now the next question will be, here is a fund which has all the qualities, one can invest and just be with it, money will have best growth. Yet, why are people still not making big gains?

Large cap funds give 10%, Mid & Small caps give 20%, Multi caps give 15%. When you hear this mind will fork out a question, where did I have such returns? All these are only numbers, just spoken, doesn’t come in reality.

True, I agree on your thought. Not all investors get to have these growth numbers which we saw here. That is because of concerns that people have in their minds. They don’t stay invested for a long period. The moment they see a small dip in their account, the next thought is how to stop it and first action is to withdraw and keep money safe before big damage happens.

Almost all of us would have known about the 2008 fall. SENSEX was at 21K, dropped to 9K. Today it is joyfully nearing 40K. In 10 years index has doubled. This price move did not happen in a smooth slope. It had 2 instances of 2 year long steep drops in price and 3 years of doing nothing. Impatient investors would have moved out and ended up having made nothing.

This is the reason why very few make big gains from the stock market investments.

Now coming to the question of where to invest?

Have a mix of all three large, Mid & Small, along with a multicap. Follow these 5 steps –

  1. Select the best fund, which has history of consistency.
  2. Be committed to stay invested for a long period
  3. Don’t watch news, it will force you to react.
  4. Have a goal with a period and target only for that, nothing else.
  5. Once a year review the investment to check if it is doing better than the markets. If not move out to a better fund, while have a discipline, not to withdraw funds in the thought to get back later. It almost always never happens.

One small tip to make a little extra profit

When Small caps index drops more than 30%, add a little more money  into your small cap allocation.

You can reduce large cap exposure and increase in Small cap.

Don’t invest in one go, use STP for a 6 or 9 month period.

In the next rally, your investment will be right at the spot to gain big & help you reach your goal earlier.